The business value in the S of ESG
Why should companies bother to be socially responsible in the world of business where shrewdness trumps fairness and charity?
Singapore
THE contrasting fates between overnight South Korean Netflix star Song Ji-a and Chinese ultra-fast fashion retailer Shein have shown how jarringly unequal the effects of cancel culture between individuals and companies can be.
On one hand, we see a beauty influencer lose her career in just one day earlier this year following revelations that some of her designer outfits on Netflix's hit dating reality show Singles' Inferno were knock-offs.
On the other hand, we see a company that is no stranger to allegations of intellectual property theft and labour exploitation cementing its status as China's latest retail decacorn, with reportedly some 100 billion yuan (S$21.2 billion) in revenue last year. It is now on a hiring spree in Singapore after it made a firm here its de facto holding company.
So when one tries to tear apart the environment, social and governance (ESG) trinity and scrutinise the business value of it all individually, it might not take long to get stumped by the middle child - social.
Technically, it covers how a company manages its relationships with its workforce, the societies in which it operates and the political environment, as well as how it upholds product responsibility and human rights.
But one might now ask: What is in it for a socially responsible company in the world of business where shrewdness trumps fairness and charity?
And as companies rush to fill the pages justifying their ESG efforts, is there a risk that the movement to get companies to think more sustainably is just pushing firms to take part in a mass "social washing" exercise - much like the situation around greenwashing?
The conundrum
Tariq Fancy, Blackrock's former chief investment officer for sustainable investing, struggled with this conundrum himself.
In his 40-page essay The Secret Diary of a 'Sustainable Investor', he wrote: "Unfortunately, many things that are lucrative are also bad for the world. There's a reason that Exxon pollutes and Facebook tries to addict us to their apps: it makes money.
"In the face of this unfortunate reality, we led the way in popularising a new and optimistic view: that companies with better performance on environmental and social issues would enjoy larger profits in the long term, as there was no disconnect between 'purpose' and profits.
"It was kind of like saying that good sportsmanship in basketball is not at odds with scoring points."
The Business Times took these propositions to thought leaders and experts watching the ESG space, and they gave their take for why more attention should be paid to this often overlooked middle child of ESG that has also come to be misunderstood.
The S pillar does not make it easy for companies too. It begs contextualisation, and, frankly, a ton of self-reflection being confronted with the hard questions, they note.
A consensus is that there is no real template to follow - each company has to do the dirty work and find out how they intercept with society, and whether they are happy with where they are at.
The bottomline is that while companies may still get away with fulfilling the E and G pillars of ESG with a box-checking attitude, they might not with the social aspect.
In so saying, Mildred Tan, chairman of Tote Board Singapore, brought up a four-decade-old statement by the Business Roundtable, an association of chief executive officers in the US.
"Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part of and the well-being of society depends upon profitable and responsible business enterprises," it states.
"Despite the fact that this was a 1981 quotation, it remains relevant for companies to be socially responsible, socially conscious as part of the eco landscape," said the former managing director of Ernst & Young (EY) Advisory who is now also co-chair for the Council for Board Diversity.
"Consequently, today, there is a continued focus for a company's social responsibility towards their staff, key stakeholders including their supply chain and the community in which they operate in."
Stephen Beng, ESG head for Phillip Capital Management, said how a company chooses to tackle the S of ESG is "very much a matter of motivations (compliance versus voluntary) and accountability (selling products versus catalysing change while doing so)".
"Intentions and motivations will vary but it's the strength of collective action that can move the needle," he added.
Notwithstanding that, he stressed that there is already a clear business case for integrating social issues into business.
A company's supply chain is more likely to be stable if it has good labour practices and less human rights violations, Beng said.
Operational performance also strengthens when staff motivation and productivity are high and turnover is low, he added.
The effects are felt
Professor Mak Yuen Teen of the National University of Singapore (NUS) Business School noted that there are currently a lot of excuses going around.
While some companies will say that taking care of the social will drive up costs and reduce competitiveness, Mak said they should look at whether those at the top are "feasting off the rest".
"If they cannot be competitive without using slave labour practices while others can be, then they probably should not be in the business at all," he quipped.
While Mak acknowledges the challenge in coming up with measurables under the S pillar, he said it is easy to develop clear policies that protect employee health, welfare and society.
He added that companies may still get away with social washing (or not paying attention to social issues) if their business operations are primarily in Singapore or Asia, but, soon, not elsewhere.
If they do business in places like North America, Europe, Australia, and other countries with the equivalent of slave labour laws, they could face sanctions or lose their business with their multinational corporation (MNC) customers from those markets, he said.
There is no lack of such examples in 2020 and 2021, where at least seven Malaysian companies were slapped with sanctions over forced labour practices. The seven include ATA IMS, FGV, Sime Darby Plantation, Smart Glove, Supermax, Top Glove and YTY.
Of note, the counter of ATA, a Bursa-listed electronic parts supplier, was sent plunging 85 per cent from around 2.50 ringgit at the start of November to 0.38 ringgit at Friday's close, after Dyson severed ties with the company amid the saga.
Pointing out that Dyson accounts for most of ATA's revenue, Mak said: "Something like this could end your business."
Meanwhile, the glovemakers lost an estimated 3.6 billion ringgit in export revenue over the US import ban, he pointed out.
Apart from the assessable losses, there is also reputational damage, which could drag down a company for a long time, he added.
New world standards
These examples show that although Asian governments have been slower in introducing regulations relating to the S of ESG, there is no escaping its effects as social issues are already starting to become more central on the world stage and integrated into the ways a company's ESG performance is being studied, Mak said.
When identifying the growing importance of the S nexus in a lookahead report for 2022, Fitch Ratings had pointed out that a social taxonomy is being formulated in the European Union (EU) to set a global standard for what "good" looks like on social issues.
This comes amid shifting consumer preferences for sustainable products, which emphasised the importance of sustainable, resilient, ethical and transparent supply chains, the report under its Sustainable Fitch vertical published last December pointed out.
The EU initiative looks set to clarify the financial materiality of social risks this year, the report said, as it also highlighted the lack of consistent and numerical data on social factors as an issue.
So while the spotlight of international regulators and companies is on the Malaysian firms at the moment, Mak believes that it may be a matter of time before Singapore entities will be in the spotlight.
There is cause for concern, he said, as Parliament recently heard that the Ministry of Manpower had taken enforcement action against an average of 102 employers a year between 2016 and 2020 for collecting kickbacks from migrant workers as a condition or guarantee of employment.
"Who are these employers? What actions were taken? Was any action taken against management and directors of these companies? Isn't this corruption and therefore an offence under the Prevention of Corruption Act?" he said.
"If any of these companies are doing business overseas or selling to international MNCs, they would almost certainly be barred from continuing to do business," he added.
In cases like Centurion and Sembcorp Marine where poor accommodation conditions were highlighted because of Covid-19, the negative publicity did not appear to lead to long-lasting damage. But companies should heed such as early warning signs and review their policies to address these issues on a continuing basis, Mak said.
The situation, for instance, would be rather different if the management of Malaysia's Top Glove had gleaned lessons from the Covid-19 outbreak at Singapore' dormitories before similar issues with their housing and working conditions led to a massive outbreak and temporary closure of factories six months on.
"The demand for their products was going through the roof then. They neglected employee welfare, and paid a heavy price later," Mak said.
Furthermore, the market often lags in identifying and pricing in social issues, including subpar disclosures on this front, given the window dressing with the help of "carefully crafted sustainability reports", he said.
"We see big stock price drops only when actions are taken - before this, companies may do well profit-wise and share price-wise."
While this may be the case, Mak underscored that good companies and boards would not wait until they are caught out.
"(Good companies) would be ensuring that there are good policies in place and that they are implemented, as not only is it good risk management, but it could also be a source of competitive advantage in the long term," he said.
How to move the needle
For a start, said PwC Singapore executive chairman Marcus Lam, companies may begin by looking hard into what is salient to the organisation and the communities it impacts.
"We now live in a world where stakeholder capitalism takes precedence," he said. "This is the age where stakeholders, not only shareholders, will challenge and hold organisations accountable financially, environmentally, and socially which underlie their licence to operate. Therefore, you can do well by doing good."
Still, good intentions and a willingness to demonstrate leadership might not be enough. Konstantinos Dimitriou, associate partner at EY's global strategy consulting arm EY-Parthenon, pointed out that, oftentimes, these are impeded by a lack of focus and clarity of goals.
"Boards want to do what is right, but struggle to define what 'right' means in a way that is consistent with their own corporate strategy and values," he said. "As a result, they end up executing fragmented and subscale individual initiatives, rather than programmes that are substantially accretive to the value of their brand, reputation and employee loyalty."
With this in mind, EY's Asean strategy and transactions leader Vikram Chakravarty said the key is to pick the right battles, focus the resources invested in a material way, track the key performance indicators that are right for the organisation, and communicate openly and clearly with investors, customers and employees.
On materiality, Dimitriou added that studies have shown that materiality often varies by sector. Employee health and safety are paramount in resources and heavy engineering, while affordability, honest selling practices and data privacy are more important in health care, for instance.
KPMG Singapore's director of sustainability services Cherine Fok noted that the prominent themes under 'social' may evolve with time. Right now, they are mental and emotional wellness, green upskilling, and equitable treatment of a diverse workforce, she said.
Currently, companies may still be afforded space to skirt disclosures related to their supply chain and let allegations fall on the wayside, left unverified, unaddressed and simply forgotten. Will we see a future where companies can no longer hide behind such a practice?
Nneka Chike-Obi, director of sustainable finance at Fitch Ratings, said the challenge with keeping supply chains in check is "not a lack of indicators but a lack of data". It is not easy to have visibility into a small garment factory in a rural area of a developing country, she said.
But some observers said the future is one where companies would more tangibly see a ceiling to their growth and ability to scale if many still have reservations about their labour practices.
Professor Lawrence Loh, director of the Centre for Governance and Sustainability at NUS Business School, said: "Most of the time, companies get away with (the way they treat their workers). But the bigger ones cannot get away - look at the big tech companies in China taking the heat for the '996' poor work culture." The trend of Chinese tech employees often working from 9am to 9pm, six days a week, provoked nationwide debate.
Mark Greeven, professor of innovation and strategy at Switzerland's IMD Business School who had published a paper on Shein's business strategy, said the Chinese company will have to show that they have the solutions to better deal with employees, while managing their environmental impact.
"That's an opportunity for them in the long run. If they can make that happen, I would say 'Oh, wow, they have a golden formula'. Today, they are not there yet," he said.
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